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Those of you who are regular readers of my column know that there are really only two things in the world that I like to do -- trade and cook. So on this holiday week when many of us preparing wonderful feasts, I had an interesting epiphany that ties both activities together.
Since I cook for my kids every day, I usually go to a farmers market on Sunday and get supplies for the week. A few weeks ago I bought two organic turkey sausages, cooked one and left the other in the fridge. Yesterday, I pulled the second turkey sausage out -( its been sitting in the fridge for about a week) and decided to cook it. I knew that I was assuming risk since the expiration date on these things is no more than 5 days, but I figured if I microwave it first, it should be ok.
Microwave it I did, but the sausage gave off just a slightly rancid wiff. I struggled for a minute with my dilemma, but ultimately knew that I risked food poisoning everyone in my family and so I dumped the whole thing into the garbage bag and started to make a brand new dinner.
Dumping uneaten food is a perfect example of sunk cost. We all hate to do it because it is an incontrovertible, physical manifestation of us BEING WRONG. We mis-bought our stock , we mis-timed our preparation in short we made a mistake. In the greater scheme of things, food is such small part our budget these days that we really don’t care. But it still bothers most of us especially if the item is expensive, because it is literally the act of dumping dollars into garbage.
Yet, most of us when faced with this decision usually don’t hesitate and do the right thing and throw it out. Why? Because the consequence of eating something rotten is a very, very nasty date with your bathroom tile floor. There is a very real and immediate physical effect to making the wrong decision about bad food. You get food poisoned and you puke your guts out. We know this from experience and quickly cut our losses ( dump the old food in the garbage).
If you think about it -- the very same dynamic plays out in our day trading. A bad trade eventually forces us to puke up our position either out of sheer pain of loss or due to a margin call. Either way the effects are just as nasty and most cases far more toxic than eating some bad shellfish. Yet when it comes to trading we dawdle, we hesitate, we procrastinate and never dump out of the position as fast as we do with bad food. Why?
The answer I think is twofold. One, a plate of old chicken is far less money than a $1000.00 loss on the GBP/USD. Thus the size of sunk costs is just much greater. Two -- and this is the key I think -- we ALWAYS thinks that this time we can avoid the pain. If we just add another lot, if we just wait it out, the price will come back and we’ll escape unscathed. Of course that never happens. We escape once, twice, but on the third, the fourth or some time eventually the game of delay and denial finally catches up with us.
So I have novel idea. In order to overcome the regret of sunk costs we need to do something dramatic. On this weekend as we stuff our bellies with more food than we will eat in a month, we should make a concerted effort to think about food poisoning. Remember every miserable detail of the experience. Remember how quickly we all stopped being atheists and begged God to please, please, please make the nausea go away.
Then we need to associate that memory with every bad trade we are going to make in 2015 so that we may truly appreciate the fact that Trade Poisoning is just as vicious and nasty as the food poisoning and we should avoid both by dumping rotten inventory as quickly as we can.